The recent focus on Ben Bernanke and the Fed, in particular what more could be done to help the economy and the unemployed, takes the pressure off of fiscal policymakers. But Congress also bears as much responsibility, or more in my view, for the slow recovery and the sorry state of the employment picture.
Fiscal policy was far from aggressive enough — at best it offset declines at the state and local level leaving the net effect near zero — yet people express surprise it wasn’t able to do more. It was also too small, way too late, and it was not persistent enough. Declines in stimulus spending as the program ends are holding back economic growth at a time when fiscal policy ought to be aiding, not stalling the recovery.
Our long-run budget problem is mostly a health care cost problem, and we do need to fix this. If we address the health care cost problem, the picture improves and any worry about bond vigilantes showing up in the future mostly goes away. If we don’t address health care costs, the long-run budget remains problematic no matter what else we do. Given that reality, there is plenty of time, plenty of room, and plenty of need for more help from fiscal policy. This was always a battle that needed to be fought on multiple policy fronts, neither monetary nor fiscal policy alone, or perhaps even in combination, was going to be enough. We needed both monetary and fiscal policy to respond aggressively, and to continue to respond as long as needed, but both have fallen short and there is no sign of monetary and fiscal policymakers moving to make up lost ground.
Monetary policymakers are feeling the heat right now, at least I hope they are, but don’t forget about fiscal policymakers — they too deserve to be on the hot seat. I understand that with all the talk of austerity, the chances of more help from fiscal policy without some huge change in the outlook is next to zero. But maybe, just maybe, we can stop Congress and the president from repeating the mistakes of the past (and present in Europe) by moving to balance the budget before the economy can handle it? I’m hoping we can avoid premature austerity — that will hurt, not help employment — but I’m not counting on it.